When to sell

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10. The argument over stoplosses

Stoplosses are intended to simplify selling by overriding human judgment. Supporters claim this is their greatest strength. Opponents counter that this is their most terrible weakness. Both arguments have their merits.

Against stoplosses, it needs to be said there are many situations where share prices can move dramatically for no very good reason - and certainly none that has to do with the business of the underlying company.

Example

Saddam's invasion of Kuwait forced shares down dramatically across the board on fears of higher oil prices. But markets rebounded when Operation Desert Storm began, and it became clear he was going to be pushed back to Iraq.

In favour of stoplosses, there are often occasions when a share price crashes before the reason is made public. Someone somewhere must have had an inkling of the bad news about to break, but the average investor could not have discovered it in time to make an informed decision to sell. Here a stoploss would have limited the damage.

As a compromise, some investors use stoplosses to make themselves reconsider their reasons for holding a share, rather than as a trigger to sell it. When a share breaches its stoploss, they take a second look at the fundamentals. If these are unchanged, they ignore the signal and hold. If it turns out there are good reasons for the drop, they sell.

In practice, strict stoplosses are perhaps most helpful to investors who have trouble making up their minds. They sometimes find it easier to follow automatic systems for buying and selling. Of course, they still have to force themselves to place those sell orders with their broker. Stoplosses stop nothing unless they are acted on!

1. When should you sell? 2. What is your overall strategy? 3. Selling for passive investors 4. When to take profits as a value investor 5. When to take losses as a value investor 6. Selling for growth investors 7. Mechanical formulas for selling 8. Selling in order to reinvest 9. Stoplosses 10. The argument over stoplosses 11. Limitations of stoplosses 12. Profit warnings 13. Selling for traders 14. William O'Neil's trading system 15. The most important rule of all 16. Emotional problems 17. Conclusion